Market bottom in review

[The following is excerpted from the Aug. 26 issue of Momentum Strategies Report.]

U.S. stocks rallied on Wednesday after an interest rate cut from China’s central bank helped eased fears that a global economic crisis is developing.  Although the intervention didn’t help China’s stock market, it apparently was enough to calm nerves on Wall Street.  The U.S. dollar index rose nearly 2% in the last two days in response to the move by the People’s Bank of China….

And after spiking to its highest level in years, the CBOE Volatility Index (VIX) pulled back nearly 16% on Wednesday in a sign that investor fear is dissipating, at least in the immediate-term.

Also helping lift investors’ spirits was a statement from Federal Reserve member William Dudley, who said that a case for an interest rate increase “seems less compelling than it was a few weeks ago.”  That would certainly qualify as a candidate for the understatement of the year.  It was also a major improvement from the tone-deaf statement of another FOMC member who said on Monday that the recent sell-off wouldn’t alter the Fed’s intent to raise rates.

In Monday’s report we examined several technical indicators which suggested that a selling climax was imminent.  First there was the apparent volume climax on Monday in which the ratio of NYSE upside-to-downside volume was an extraordinary 1:33 in favor of declining volume.  The last time such an extreme in trading volume was witnessed was in August 2011, at the end of the primary correction low that year.  The Arms Index also spiked to 3.09 on Tuesday, a reading consistent with previous market reversals.

Then there was the testimony of the S&P 500 overbought/oversold oscillators, which had hit oversold readings not seen in several years.  The 5-day oscillator, for instance, hit its lowest reading since the depths of the credit crash in October 2008.  The more important 20-day oscillator for the SPX on Monday hit its most oversold reading since August 2011. 

The nearest weekly Kress cycle of interim significance was also scheduled to bottom by no later than Tuesday, Aug. 25.  I had stated that if the stock market didn’t rally by Wednesday and continued declining, the longer-term bull market which began in 2009 would be seriously called into question.  Thankfully that wasn’t the case as stocks were finally able to muster a short-covering rally in response to the lack of troublesome news (if not “good” news in regard to China’s policy response). 

However, equities still aren’t out of the water by any stretch.  There remains much work to be done in the way of confirming a solid short-term bottom, and there are still a lot of negative internal momentum currents that need to be reversed before we get an “all clear” signal….

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